The Comedy of Mises

Mises’s economic calculation problem is an argument constantly used as a “slam dunk” against Marxists. However, Mises’s argument not just incorrect, it is, frankly, comedic. It should not be cited by people who actually want to be taken seriously, but it often is. We shall see how Mises’s argument not only does not make any sense at all, but is hardly even relevant in the modern era, and the fact it is still cited is just baffling.

Often, Mises’s arguments are misrepresented by his own supporters to try and make them sound better than they actually are. For example, in a graduate paper from the Mercatus Center of the George Mason University by Joseph Kane, a supporter of Mises, which I have seen shared around quite a bit, this includes a summary of Mises’s argument credited to Peter Boettk.

1. Without private property in the means of production, there will be no market for the means of production;
2. Without a market for the means of production, there will be no monetary prices established for the means of production;
3. Without monetary prices, reflecting the relative scarcity of capital goods,
economic decision makers will be unable to rationally calculate the alternative use of capital goods.

Indeed, this argument makes sense. If you have no way to establish the cost of capital goods, then structuring the economy in a “rational” way at all would be quite difficult.

But notice there is a step missing here. Between 1 and 2. There is simply the claim that without a market for the means of production, there will be no way to price the means of production. No way to perform any sort of economic calculation.

This is not a “summary” of Mises’s argument. It’s not even an argument at all. The whole argument is left out of the “summary.” It is, in fact, a mere stating of the problem to be solved, but the argument that it is “unsolvable” has been left out entirely.

Indeed, this is often how I have routinely see people recount the ECP. There is simply an insistence that without the markets, there is no way to price anything, without establishing a real material reason why this is the case. It is as if markets are a supernatural thing, that self-generate prices in and of themselves, and without the existence of them, it is impossible to know anything.

This is clearly nonsensical. Economic systems are material things existing in the real, material world. The function the markets perform therefore must, too, be something material. And, by necessity, if you fully understood how such a process worked, it should be, at least in principle, possible to perform these calculations directly, without the markets.

There are two arguments often conflated with Mises which are not the same as Mises’s argument. The first is the “Friedman’s Pencil Argument.” This argument points to the immense complexity in a market economy, how even a simple pencil requires the coordination of dozens of enterprises from all over the world. This immense complexity, thus, would make economic planning impractical.

This is an interesting argument, and indeed, economic planning often is impractical. Central planning requires an enormous amount of infrastructure to gather inputs from consumer demand and the internal operations of the means of production, as well as immense computational power to then act upon this information. Economic planning, thus, requires real material means, and a lack of it, especially in developing countries, has made it difficult to work.

But this is not really Mises’s argument. Nor is it in any way a “debunking” of Marxism. As Marx explicitly would have agreed with all of this. Marx never argued for an immediate implementation of a fully planned economy. Rather, he argued that markets have a tendency to centralize over time, as enterprises grow larger and larger due to competitive pressures.

Markets encourage enterprises to figure out ways to scale up their operations, meaning that markets themselves encourage enterprises to find ways to better collect information and to better compute that information for larger-scale planning.

The only enterprises which are to be expropriated are those which already have formed into natural monopolies, which already have “matured” to the point where they no longer can be competitive. These enterprises would already, in the process of this “maturation,” figured out how to operate on such a large scale. I will circle back around to this point later.

The fact that economic planning is difficult, thus, has little relevance to Marxism. This “difficulty” is reduced gradually by the markets themselves, as they continually develop new techniques to defeat the competition and to scale up their operations. Sure, full economic planning may not be possible today, but that does not mean, in, let’s say, one-hundred years, it still won’t be.

Mises, on the other hand, did not believe economic planning was possible in a hundred, a thousand, or even a million years. Mises did not see economic planning as merely a problem of lack of technology and infrastructure. Rather, he saw it as impossible in principle no matter what the level of technological development is.

The second argument often conflated with Mises is the that Mises was proposing a sort of “knowledge problem” regarding subjective values. In this argument, it is usually asserted that the kind of infrastructure needed to collect information on subjective consumer demand, which is ever-changing and incredibly complex, would be impossible, so the planners would not even know what they are planning for in the first place.

However, this is also not Mises’s argument. Mises, in fact, concedes from the starting point that he could imagine a centrally planned society fully being able to take into account all consumer demand.

It will be evident, even in the socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved.

— Mises, Economic Calculation in the Socialist Commonwealth

Mises’s argument is different to both of these. Mises starts his argument pointing out that in a planned economy, there would be a clear line of demarcation separating consumer goods from capital goods. This would be because capital goods would be owned publicly, and therefore not on the market. In capitalist society, capital goods are still bought by enterprises that need them, but in a socialist society, they would have to be allocated from one enterprise to the next intentionally. The only “market” that occurs is the market of the direct consumer at the end of the manufacturing process, when those consumers can then spend their labor tokens in a shop.

There are two reasons Mises finds this separation to be important.

First, Mises concedes that economic planning is possible, but only on small scales. This is because on small scales, the planners are also the direct consumers. This allows them to very easily gauge the efficacy of any minor change in the production process, as they would immediately find themselves consuming more or less goods and services as a result.

Only under simple conditions can economics dispense with monetary calculation. Within the narrow confines of household economy, for instance, where the father can supervise the entire economic management, it is possible to determine the significance of changes in the processes of production, without such aids to the mind and yet with more or less of accuracy. In such a case the process develops under a relatively limited use of capital. Few of the capitalistic roundabout processes of production are here introduced: what is manufactured is, as a rule, consumption goods or at least such goods of a higher order as stand very near to consumption-goods…In the narrow confines of a closed household economy, it is possible throughout to review the process of production from beginning to end, and to judge all the time whether one or another mode of procedure yields more consumable goods.

— Mises, Economic Calculation in the Socialist Commonwealth

Second, Mises finds that this direct consumption is where all economic calculation is performed, as individuals during a transaction have to participate in the evaluation, and therefore calculation, of the value of that product. In capitalist economies, everyone is both a producer and a consumer, all goods and services are subjected to the market, this evaluation occurs at every step, and this is what leads to their price formulations.

Now, in the economic system of private ownership of the means of production, the system of computation by value is necessarily employed by each independent member of society. Everybody participates in its emergence in a double way: on the one hand as a consumer and on the other as a producer. As a consumer he establishes a scale of valuation for goods ready for use in consumption. As a producer he puts goods of a higher order into such use as produces the greatest return.

— Mises, Economic Calculation in the Socialist Commonwealth

This leads to Mises’s argument. Price formations are formed through the interaction of direct consumption and production. But in a socialist system, direct consumption only exists for the manufacturers at the very end of the supply chain, what Mises refers to as the “lower order” manufacturers, while those at the “higher order” would not have any direct interaction with the consumers, and thus would lack any sort of price signals.

Only the private market economy has market signals at both orders, because the capitalists act as both a consumer and a producer. The lack of market signals for the “higher order” manufactures in a socialist society, Mises argues, will have no way of evaluating whether or not changes in production lead to improvement or not, or whether or not there is waste being generated, because they have no direct feedback from consumers.

Every good will go through a whole series of stages before it is ready for use. In the ceaseless toil and moil of this process, however, the administration will be without any means of testing their bearings. It will never be able to determine whether a given good has not been kept for a superfluous length of time in the necessary processes of production, or whether work and material have not been wasted in its completion. How will it be able to decide whether this or that method of production is the more profitable?

— Mises, Economic Calculation in the Socialist Commonwealth

This argument, in a vacuum, is circular. The only “prices” it considers are prices from market interactions. Since market transactions do not exist between the means of production, in the “higher orders,” it and then concludes that prices therefore will not exist at all, that there will be no signals, as if prices are, by assumption, the only signals.

I mentioned prior that economic systems are material things. We should be able to, theoretically, measure the “cost” of production according to the amount of resources expended. This is what Adam Smith referred to as the natural price of a product as opposed to the market price.

The natural price is not identical to the market price. A gummy bear might sell on eBay for hundreds of dollars, but clearly the amount of resources that can be purchased with that money is more than what went into producing the gummy bear. The natural price refers to the physical amount of resources that go into producing a good or service.

There is sometimes an attempt to conflate these two things together, and to scoff at the idea of a natural price being possible to calculate as “absurd” because of the absurdities of markets, and the possibility of absurd transactions, such as, a highly priced gummy bear. But this is, again, a conflation, because calculating a natural price would not be for the purpose of replicating such absurd prices.

Any economic planner which calculated the market price would not be doing this for the purpose of trying to replicate the exact kind of chaos in a market economy. They would, instead, be performing this purely for the purpose of having some sort of price signal which can inform them of whether or not changes in the production process are beneficial or not. Recall that this is the crux of Mises’s argument to what he says it impossible.

Mises was aware of this of the notion of a natural price. He explicitly argued that he did not believe natural prices could be an alternative signal, and described it as an “illusion.”

It is an illusion to imagine that in a socialist state calculation in natura can take the place of monetary calculation. Calculation in natura, in an economy without exchange, can embrace consumption goods only; it completely fails when it comes to dealing with goods of a higher order. And as soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible. Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.

— Mises, Economic Calculation in the Socialist Commonwealth

We have not gotten to the crux of Mises’s argument. At the beginning, I gave a “summary,” which skipped over entirely the explanation of why markets would not have prices. So far, we have just moved the discussion a bit, but we are back to where we started. There is no market of capital goods, and therefore, no price mechanisms at all, and therefore, it is impossible to plan it at all.

Again, the second step is not explained. How does not having a market lead to not having market prices? That is the crux of the argument. I often see, when Mises is discussed, a lot of focused placed around all these factors mentioned prior. But, in reality, nothing I have mentioned so far is really relevant, as all of it just pushes the same question further: why can’t prices be calculated directly without a market?

Every variation of the ECP must answer this question clearly. Otherwise, they would fall into supernaturalism. Insisting that markets alone have the power to coordinate production efficiently without any real material explanation to why is quite literally ascribing supernatural characteristic to the markets, that the markets are capable of doing something which cannot be explained physically.

In a centrally planned economy, with sufficient levels of infrastructure to collect the necessary information, and sufficient computational power to process that information, clearly, you could plan it efficiently. You would know what the consumers want, as well as the organization and efficiency all the manufactures, and thus could calculate the most efficient way to distribute resources to all the enterprises to accomplish this using as little resources as possible. Paul Cockshott’s book Towards a New Socialism discusses such algorithms.

Mises’s complaint regarding lack of direct feedback would become irrelevant. If an enterprise, even a “higher order” enterprise, made a small change to its production process, not only could it still evaluate its own efficiency based on observing an increase or decrease in its direct outputs, but this algorithm could be ran again, computing its impact across the entire economy, how it would affect all other manufactures going up to the “lower order.”

Mises already conceded that the information gathering was possible. Rather, what Mises attacks is the computational ability to process this information. The core of his argument comes down to, and don’t laugh, that the “human mind” is incapable of computing such immense amounts of information.

[O]nce this decision has been taken [on what to produce based on the information gathered of consumer demand], the real task of rational economic direction only commences, i.e., economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location.

— Mises, Economic Calculation in the Socialist Commonwealth

In a post-script to the version of this book that I possess, the Austrian economist Joseph Salerno summarizes Mises’s argument in this regards.

Mises’s pathbreaking and central insight is that monetary calculation is the indispensable mental tool for choosing the optimum among the vast array of intricately-related production plans that are available for employing the factors of production within the framework of the social division of labor. Without recourse to calculating and comparing the benefits and costs of production using the structure of monetary prices determined at each moment on the market, the human mind is only capable of surveying, evaluating, and directing production processes whose scope is drastically restricted to the compass of the primitive household economy.

…a single human mind — even if it were miraculously endowed with complete and accurate knowledge of the quantities and qualities of the available factors of production, of the latest techniques for combining and transforming these factors into consumer goods, and of the set of all individuals’ value rankings of consumer goods — would be utterly incapable of determining the optimal pattern of resource allocation or even if a particular plan was ludicrously and destructively uneconomic

— Salerno, Economic Calculation in the Socialist Commonwealth

This argument is almost comical. The Austrians seem to believe that Marxists think that economic planning will be carried out by “a single human mind!” The crux of Mises’s argument comes down to the fact that “the human mind” is incapable of performing such complex computations, even if with infinite access to all information.

I have, in the past, seen Mises fans on the internet claim that Mises’s argument was that economic planning was impossible even if you have infinite access to information and infinite access to computational power. But this is fundamentally a misrepresentation. Mises only accepts as a premise infinite access to information. The entire core of his argument is that the ability to compute it is impossible, because “the human mind” is incapable of such computation.

Humans cannot see anything microscopic with the naked eye, by definition. But that does not prevent us from inventing tools to let us see beyond our naked eye. The truth is, Mises published this in 1920, prior to the invention of the modern computer, which in their earliest forms really started to only materialize in the 1930s. Mises simply lacked the creative imagination to consider that humans might invent tools to improve computation as well, and instead imagined all economic calculation as being performed purely by hand.

Indeed, Mises repeats this idea twice, to make it clear that he very much believes that economic calculation in a planned economy would be carried out by a “cunning mind,” and that this mind has a computational limits which cannot process the complexity of production. Not just “the human mind” in general, but Mises very specifically believed planning would all be carried out by a “single man.”

[T]he mind of one man alone — be it ever so cunning, is too weak to grasp the importance of any single one among the countlessly many goods of a higher order. No single man can ever master all the possibilities of production, innumerable as they are, as to be in a position to make straightway evident judgments of value without the aid of some system of computation.

— Mises, Economic Calculation in the Socialist Commonwealth

This is the comedy of Mises’s argument. Even without the foresight to predict the development of computational technology, Mises should have at least known that a single man would not be carrying out economic planning, that planning is carried out by the combined minds of millions.

True, in highly planned economies such as the Soviet Union, planning was not carried out by computers as they had yet to exist. Yet, planning also was not carried out by a single man. There was a single planning authority, but this planning authority would delegate tasks to individual local authority, which would then, in the millions, solve problems in their local arena independently.

All references to Mises’s variation of the economic calculation problem, thus, are incredibly boring, and incredibly outdated. Marx was proven correct, and Mises wrong, that the markets would continue to figure out ways to scale up production. Even if Marx could not articulate how they would accomplish this, even if Marx could not predict the modern computer, he accurately predicted that enterprises would continue growing larger as the market system inherently encourages them to continue finding solutions to these very problems Mises put forwards.

Neither Marx nor Mises predicted the modern computer. But Marx predicted that market mechanisms would push enterprises towards finding better and more efficient ways to scale up production, which inherently entails solving problems of both information collecting and computational processing on larger and larger scales. Austrians cannot see beyond their own nose, and fail to consider the constant advances of technology. They do not see market economies as part of a long historical process of development, but instead see them as static and eternal entities.

This is the fundamental core of Mises’s entire argument. If you remove this core, economic planning for a socialist economy ceases to become “impossible.” Merely, it becomes difficult again. True, economic planning is “difficult.” No Marxist should forget this. But this is a very different argument from saying it is impossible.

Later in the book, Mises also attacks specific proposed methods of planning, particularly planning by use of socially necessary labor time as a measurement for efficiency. However, none of this really matters, because Mises not only admitted that the information can be collected on consumer preference, but by saying “it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil,” he is also accepting that the exchange ratios between products are known.

This means not only is Mises assuming consumer preference is known, but also rations between what people prefer. This would mean that, in Mises’s own system, an enterprise could “test its bearings” without ever referencing socially necessary labor time, but in fact could just reference consumer preference, and whether or not a change in the production process yields greater or lesser social utility.

Mises, of course, believes in subjective theory of value, that value does not derive from labor but from subjective utility. Arguably, these notions do not even contradict, since Marxists and neoclassicists mean something entirely different when referring to “value” in these cases, and thus they are not mutually contradictory. I translated a Chinese academic paper here on this topic, and there is another interesting one here.

However, even if we are to assume these two things are mutually exclusive and that we must necessarily throw out any labor-value analysis, this still does not save Mises, because Mises believes value derives from subjective utility which is expressed through market transactions, and argues that on the market a person can easily “test their bearings” by observing whether or not changes in the production process lead to greater or lesser consumption, i.e. whether or not is subjectively more or less useful, due to the neoclassical law of nonsatiation.

From this point of view, then, an enterprise could “test its bearings” simply by observing the effects in changing the production process has on social utility, since Mises accepts that these things are already known. The only argument Mises has against this, really, is that a “human mind” would not be able to compute such a complex economy to understand how a change in a “higher order” manufacture would go up the supply chain to the “lower orders” before directly affecting the consumer. But, of course, it would not be up to the “human mind.” Mises’s mind lacked foresight and imagination to think that humans would never invent a tool to enhance computational abilities, and genuinely believed this would be all performed by not just human minds alone, but he even asserts a “single” human mind.

This argument can thus on these two fronts be dismissed on its very face.

— — — —

From this point on, I will take a bit of detour and discuss another point related to Mises’s argument, and why Austrians often miss the point of Marxism and thus fail to create a convincing rebuttal, even if I were to accept all their arguments as true.

Mises’s argument, even if it was accurate, misses the point, and thus fails to even address the main Marxist argument which I have spelled out in numerous article. No matter how much the Austrians decry planning, competitive markets are always tending towards it regardless.

Capitalism already plans, but the plans are the exclusive domain of the decentralized enterprises, and then these enterprises interact with each other on the market. If enterprises continue to grow, then, as a necessity, planning continues to grow in scale as well. If the market economy becomes more and more dominated by these growing, large-scale enterprise, then the influence of economic planning becomes more and more prevalent, while the influence of market transactions between enterprises becomes gradually less influential in economic calculation.

Even if the Austrians successfully prove economic calculation is impossible without markets, but they fail to prove disprove the natural monopolistic tendency of markets in the long-run, then they have formulated a self-defeating argument. This would, inevitably, lead us to the logical conclusion that capitalism must eventually collapse, as it would become too centralized for its own ability to plan.

This inevitably leads us to make some empirical predictions. I know, I said “empirical!” I don’t mean to scare away the Austrians! But it is important for any theory to actually compare it to the evidence.

If planning over markets inherently leads to economic inefficiency, there are two ways to interpret this, either as a “Spectrumist” or as a “Thresholdist.” The Spectrumist would argue that there is a spectrum from full markets to full planning, and there is a negative correlation of economic efficiency all the way along the spectrum. The Thresholdist would argue that economic planning may be efficient on small scales because it still relies on the markets for much of its inputs and outputs, and thus the economy would only fall apart beyond a certain threshold.

Most Austrians are, in fact, both, at the same time. And they flip-flop between them depending on which is most convenient. When it comes to passing laws to introduce public services in the economy, they hold the Spectrumist position, insisting that even a small increase in public control will lead to economic inefficiency. Yet, when you actually try to compare this claim to the empirical data, they instead shift towards a Thresholdist view.

Let us start with the United States as an example. Three firms in the United States are the major shareholder of 40% of all publicly traded enterprises in the United States (source). These “investment managers” have the specific job of planning out the allocation of capital investments, all from a central location. Naturally, they do it with computers, such as BlackRock’s Aladdin system, not as a “single mind” like Mises imagined.

How, then, with such high levels of central planning, has the United States not completely collapsed? At this point, the Austrian would take on the Thresholdist position. The US may have a lot of big corporations, but it’s far far far from a totally planned economy like the Soviet Union. 40% is still a minority, market mechanisms are still the majority. It has not hit a threshold to collapse yet.

Some Austrian may reply, “no no, centralization in the private sector doesn’t count (for some reason)! It only counts in the public sector!” Okay, let’s, for example, assume the Spectrumist position, and only take into account the public sector. We should thus naturally predict, and this is easily empirically measurable, that a greater proportion of the economy controlled by the public sector would yield a negative correlation to GDP growth.

Yet, the evidence does not show this. It is just a matter of faith to the Austrians. There is absolutely no correlation between public sector size and GDP growth. And this is not surprising, as Marxists have repeatedly pointed out, the proportion of markets and planning that is viable is relative to the different material conditions of particular countries. Neither markets nor planning are inherently superior to one another. It is conditional.

Again, when faced with this clearly contradictory empirical evidence, the Austrians will shift back to the Thresholdist position. None of these countries have crossed the “threshold,” in their mind, of “too much” planning.

This, to me, is the core question, which I have never seen a satisfactory answer provided to me from any Austrian. Where is this threshold? In China’s economy, 40% of the entire GDP output of the country comes from the public sector. Yet, China is also one of the fastest growing economies on earth. Clearly, 40% is not the threshold

Is it 50%? 60%? 90%? What particular measurements? Picking GDP output percentages seems a bit arbitrary. Why not employment by sector percentages? Number of enterprises percentages? How do we measure this, and how do we know what the threshold will be?

Otherwise, the Austrian position is logically equivalent to the evangelical Christian prediction of Jesus’s return. Market economies are always centralizing more and more over time, and according to the Austrians, at some threshold, it should become too centralized to operate, it should fall apart. We will hit the threshold eventually. Yet their predictions never come to pass.

Let’s talk about the Soviet Union. Even the Soviet Union, which was a highly planned economy, still had a markets for its entire existence. They had domestic market in the agricultural sector through the kolkhoz farms, as well international markets as they traded between countries. If markets are necessary for economic calculation, then clearly, the Soviet Union had markets. So it should have no trouble with economic calculation. In fact, Stalin even noted that the markets were useful to “discipline” the planners who would often come up with poor price calculations as a way to teach them what a “rational” price actually was.

Consequently, our enterprises cannot, and must not, function without taking the law of value into account. Is this a good thing? It is not a bad thing. Under present conditions, it really is not a bad thing, since it trains our business executives to conduct production on rational lines and disciplines them. It is not a bad thing because it teaches our executives to count production magnitudes, to count them accurately, and also to calculate the real things in production precisely, and not to talk nonsense about “approximate figures,” spun out of thin air.

— Joseph Stalin, Economic Problems of Socialism in the USSR

The Soviet Union, was, in fact, one of the largest growing economies in the 20th century, and became the second largest economy in the world at its height (source). Salerno tries to save himself by saying that the Soviet Union does not disprove Mises as the Soviet Union still relied on the world markets for price signals.

[T]he existence of the Soviet Union and other centrally-controlled economies is no refutation of his thesis regarding the impossibility of socialist economy. Their gross inefficiency notwithstanding, these economies in fact do eke out a precarious existence as parasites on the social appraisement process and integrated capital struc-ture produced by the surrounding world market.

— Salerno, Economic Calculation in the Socialist Commonwealth

Mises makes a similar argument but in regards to state ownership within a capitalist system. The state ownership exists within a much larger privately owned economy, so it still has price signals from the surrounding markets to go off of. The state ownership in Mises’s case, or in the case of socialist states, are a sort of “oasis” of planning but are still surrounded by markets.

[T]he extent to which socialism is in evidence among us constitutes only a socialistic oasis in a society with monetary exchange, which is still a free society to a certain degree. In one sense we may agree with the socialists’ assertion which is otherwise entirely untenable and advanced only as a demagogic point, to the effect that the nationalization and municipalization of enterprise is not really socialism, since these concerns in their business organizations are so much dependent upon the environing economic system with its free commerce that they cannot be said to partake today of the really essential nature of a socialist economy. In stat

— Mises, Economic Calculation in the Socialist Commonwealth

Apparently, public ownership can sustain itself, as long as there are price signals, even according to the Austrians. The empirical data has repeatedly shown that the Spectrumist position is completely untenable.

It is even more comedic that Salerno accuses the Soviet Union of “inefficiency” despite becoming the second largest economy in the world, while the return to free market policies destroyed their economy and set them back about twenty years and killed millions of people.

THE ‘WASHINGTON CONSENSUS’, which for nearly a decade put the best face it could on Russia’s mis-transition, is showing signs of crumbling. It is now acknowledged that the Russian Federation’s post-communist depression was deep and painful, causing immense physical hardship and psychological stress. After reporting unemployment in the low single digits during the first half of the 1990s, it turns out that more than 17 million are seeking work or have left the labour force after years of discouragement…the physical hardships, social disruption and psychological distress associated with a 44% decline in Russia’s GNP caused millions of premature deaths, in addition to any adverse impact they may have had on fertility. The exercise reveals that there were 3.4 million Russian premature deaths in 1990–98 plausibly attributable to the travails of post-communism.

— “Premature Deaths: Russia’s Radical Economic Transition in Soviet Perspective”, Europe-Asia Studies

Russia did not start recovering until 2003. This was the same year Vladimir Putin abandoned the free market model for Russia and embraced a state capitalist model instead.

Russia under Boris Yeltsin was economically depressed, militarily enfeebled, and dependent on Western assistance…Virtually all these assets were under government control until privatization of the mid 1990’s…There is wide consensus that the arrests of Yukos major shareholder, Platon Lebedev for fraud in July 2003 and the oil giant’s CEO, Mikhail Khodorkovsky for tax evasion in October 2003 were seminal events in Putin’s first term as President, marking the beginning of the process of re-nationalizing strategic industries by the Kremlin.


Repeatedly throughout history we have seen increasing levels of planning actually lead to far more growth and not less. The Spectrumist position, which Austrians always push when arguing against any sort of expansion in public programs, no matter how minor, is completely untenable.

The question then becomes, again, where is the Threshold?

In China, GDP output is only 40% of the public sector. But this 40% is all incredibly large enterprises, and they are centralized around the state. The term “divide and conquer” refers to the fact that a decentralized army is easier to defeat than a centralized one. 40% of large-scale centralized ownership is quite easily capable of projecting its authority over the remaining 60%.

This 40% also consists of enterprises much more important to the economy that other enterprises rely on, such as heavy industry, banking, and infrastructure. The government also extends control into private enterprises as well through party organizations.

As I explained in my article on what is socialism, all that socialism needs to qualify as “socialism” is to become dominant, for the public sector and democratic planning to become principle of the capitalist sector.

As Engels said in Socialism: Utopian and Scientific, the state taking over industry is not sufficient for a socialist system. A socialist economy has to have a new form of government. The monarchical system was founded to benefit feudalism. The liberal democratic system was built to serve capitalism. Socialism needs a new political system to serve socialism.

In order for there to be stable economic planning in a socialist system, the parliamentarism must be abolished, which China has done, and has replaced parliamentarism with a highly democratic working body. There must be economic planning, which China has Five-Year plans as well as a planning bureau under the National Development and Reform Commission. China also requires, by law, state-owned enterprises to be controlled by workers’ congresses (source). And, most importantly, the Chinese state is controlled by an explicitly socialist party, an organized vanguard of the working class.

These things set China’s model apart from Russia’s model, and make it no longer state capitalist but really socialist, a form of a socialist market economy.

Let us assume, for a second, that the Austrian Thresholdists are correct. In fact, we will throw them an additional bone and say that China is at the very Threshold, meaning any increase in public control will lead to economic downturn.

At this point, at best, all the Austrians have proved is that only a limited form of socialism can exist. Only a socialist market economy. But not a fully planned system.

In Marx’s Manifesto, he explicitly calls only for an “extension” of state ownership, and the rest would be expropriated “by degree,” meaning, gradually. This is because, again, Marx saw socialism as built upon the natural monopolies laid by capitalism. So if a communist revolution occurred before these natural monopolies existed across the whole economy, you could not expropriate the whole economy in one stroke, but only gradually, alongside development.

However, Marx was not advocating for waiting around for the entire economy to become centralized. Quite the opposite. By writing this, he was acknowledging that a revolution does not need to wait for 100% centralization. The communist revolution only needs to wait for there to be sufficient centralization in order for the new socialist government to expropriate enough industry to place public ownership as the leading role of the country.

What this means is that, unless the Austrians can show this threshold lies prior to this point, then the Austrians have failed to disprove the efficacy of the communist revolution. Even if the threshold lies just barely beyond this point, as is the case with China, one could still argue for the efficacy of a socialist market economy.

Hence, Austrians cannot be vague. They cannot rely on the Spectrumist position as it is untenable. They instead must rely on the Thresholdist position. However, there are two thresholds here. There is the Austrian threshold of when centralization and planning supposedly becomes untenable. And then there is the threshold when centralization and planning are sufficient for a communist revolution.

If the Austrian cannot, very rigorously, prove the former is prior to the latter, then they have not proven a socialist society cannot be built.

However, all this is assuming that the Austrians are even correct that planning becomes “untenable” at some point. As we have seen, Mises’s argument for this is comical. But the Austrian argument also fails to explain why the Soviet Union’s economy grew so fast. Even if, true, it stagnated in the 1970s, if you believe planning inherently means economic inefficiency, then the fact it did not stagnate for most of its existence is something you have to explain.

For Marxists, it is easy to explain, because we do not hold planning or markets to be universally good or bad, but evaluate based on the material conditions. We can give an analysis in how the conditions of the Soviet Union up until the 1970s were not he same as those during the 1970s, and thus we can explain why planning may have worked initially and not towards the end without contradicting ourselves.

The Austrians constantly are forced to contradict themselves, because their universalist and absolutist views means every single example of planning leading to increased economic efficiency debunks their whole worldview.

Mises’s argument is thus not only comical, but it entirely misses the point.



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I have a Bachelor of Science in Computer Science. Coding and Marxian economics interests me. I write code for a living.